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RBI’s Favourite Son : Uday Kotak : Part II

With D-day fast approaching (31st Dec 2018, by which time stake needs to be reduced to 20%), a highly innovative but unorthodox method of promoter stake reduction was proposed by the bank, which not only got the attention of the regulator (RBI), but also had promoters of other private banks who have already sold shares to meet ownership norms feeling short changed. Kotak Mahindra Bank on 2nd August 2018 issued an instrument which effectively brought down its promoter shareholding from 30.03% to 19.70% in accordance with RBI’s mandate, but it did so without diluting its voting power. On the face of it, this seems like a win-win situation for both parties (regulator as well as regulated), but which financial instrument lets you bridge this gap and enjoy the best of both worlds? Enter the perpetual non-convertible preference shares (PNCPS), an instrument that forms a part of shareholders funds (share capital), therefore, the issue of such an instrument will contribute to the reduction of promoter shareholding, but, the beauty is, preference shares typically do not hold any voting rights and hence the voting power and control that promoters exercise over their entities are intact and remain undiluted. Kotak Bank, with the issue of Rs 500 crore worth of PNCPS effectively reduced its promoter held total share capital to below the maximum permitted by the RBI, but also managed to maintain its skin in the game i.e. total voting power of above 30%.

Sure enough, within two weeks, on 14th August, the lender of last resort (RBI) had the final word. The RBI rejected the promoter stake dilution plan presented by Kotak Mahindra Bank stating that preference shares cannot be counted as part of equity share capital and suggesting that the spirit of the law was not being followed. Even though technically one could argue that this method is an acceptable form of promoter stake dilution, the RBI perhaps rightfully viewed it differently, as this case sets a precedent for any such future action by banks who might be encouraged to interpret the law according to its own benefit without paying heed to the Reserve Bank’s wishes. Team Kotak, however, stuck to its guns and insisted that they have met the requirement and would engage with RBI on this behalf. The bank continued to maintain that it did not contravene any provisions of SEBI Act, Companies Act, Banking Regulation Act or even RBI Basel-III norms and should not be shown the short end of the stick by the regulator.

The final result of this entire episode culminated with Kotak Mahindra Bank filing a writ petition in the Bombay High Court on 10th December 2018 to validate its position defending its stance by saying that it was left with no option but to protect its interests in this manner. To the bank’s disappointment, the two judge led division bench of the Bombay High Court denied it interim relief on 17th December to stay the 31st December order of RBI. The next hearing was adjourned till 17th January before which the RBI will have to respond. In a long drawn battle that involved big amounts of money and big egos, the light at the end of the tunnel seems to be pointing the RBI’s way for now and a formidable challenge to its authority has been met.

 

 

Another private sector bank has another tale to recite, albeit on similar lines. Kolkata headquartered Bandhan Bank faced the wrath of the central bank when it failed to reduce its promoter shareholding to 40% within three years of commencement of operations. The bank was granted in-principle approval in April 2014 and began operations a few months later. The RBI froze the remuneration to MD and CEO Chandra Shekhar Ghosh at the current level and even put a restriction on opening new branches unless it seeks prior approval of the regulator. The regulator seems to have sent a strong message to Bandhan Bank and other private banks, but one can’t help but wonder about the reason for this abnormal regulatory forbearance when it comes to Uday Kotak and his outfit.

The story of how Kotak retained the highest promoter shareholding amongst prominent new private sector banks (including IndusInd Bank, HDFC Bank, Bandhan Bank etc.) reveals his undue influence in banking, business and regulatory corridors. His proximity to people in high places within RBI and SEBI circles is no secret. Uday Kotak is on the research advisory council at an institute promoted by RBI, despite being a non-academic. He was invited to lecture the senior management of RBI in October 2015 at their internal conference on corporate governance, this being the first instance of its kind that a serving CEO of a bank has addressed an internal RBI senior management event. Raghuram Rajan and the media-shy Urjit Patel, two former RBI governors, delivered a speech at a private event promoted by the Kotak family, proving that they had no qualms about publicly associating themselves with a bank promoter under their supervision. Uday Kotak sits on the board of governors of a public trust established by SEBI and is also a member of Primary Market Advisory Committee of SEBI. Further, he was declared as chairman of the newly appointed board of debt-ridden defaulter Infrastructure Leasing and Financial Services (IL&FS) to supersede the previous board accused of mismanagement and compromise of corporate governance in an effort to revive the NBFC that is responsible for the liquidity crisis that plagued the nation recently. All things considered, Uday Kotak seems to be the favourite child among a list of heavy hitters in the banking and financial services space and an analogy of him being somewhat like a spoilt son of the soil wouldn’t be all that farfetched. It will be interesting to observe whether the recent change in governors at the RBI would bring the poster boy of the Indian banking sector (Uday Kotak) in line or give him a further free reign.

 

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